Itaú BBA - Industrial production declines in Mexico

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Industrial production declines in Mexico

February 12, 2019

We expect economic activity to slow to 1.7% this year, with risks tilted to the downside, from a preliminary estimate of 2.0% in 2018

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Industrial production came in below market expectations in December. The indicator decreased 2.5% yoy in December (from -1.2% in November), below our forecast (-1.2%) and the median of market expectations (-1.6%). At the margin, all sectors weakened in the 4Q18. With seasonally adjusted figures, industrial production decreased 0.4% mom in December (from -0.6% in November), taking the quarter-over-quarter annualized growth rate to -6.5% in the 4Q18 (from 1.4% in the 3Q18).

We expect economic activity to slow to 1.7% this year, with risks tilted to the downside, from a preliminary estimate of 2.0% in 2018. Uncertainty over the new administration’s policy direction and over the approval of the renegotiated NAFTA by the U.S. Congress will continue to weigh on investment. Deceleration in the U.S. economy will also curb growth. Moreover, fall in oil output is also a downside risk to economic activity.
** Full story here


Paper cardboard dispatches (ABPO) disappointed again in January. The result was consistent with industry capacity usage (NUCI) and the Anfavea’s auto sector data over the same period, but weaker than traffic of heavy vehicles. The index rose 1.3% mom/sa in January (our estimates), yet, the increase was not enough to offset the 2.8% accumulated decline since October, so the 3-month moving average fell 0.5%. In year-over-year terms, the index fell 0.2%. 

We believe that the relative weakness of the industrial sector is a consequence of two factors: i) lagged effect of tightening financial conditions in previous quarters; and ii) slowing global growth, particularly in countries that are large buyers of Brazil’s manufactured items. Our preliminary forecast for January’s industrial production weakened by 0.3pp to 0.3% mom/sa (-0.4% yoy).

According to the Focus survey, the IPCA inflation expectations for 2019 declined 7 bps to 3.87%, and did not change for 2020 and 2021 (at 4.0% and 3.75%, respectively). The year-end Selic rate expectations remained stable at 6.50% for 2019 and at 8.0% for 2020 and 2021. The median of the forecasts for the exchange rate did not change for the three years horizon (2019-2021): at BRL 3.70/USD for 2019; at BRL 3.75/USD for 2020; at BRL 3.80/USD for 2021. The median of GDP growth expectations also remained unchanged at 2.50% for the three years horizon (2019, 2020 and 2021).

The Copom minutes was just released; we will publish a report on the central bank’s document today.


At the end of January, the budget office revealed that the nominal fiscal balance reached a deficit of 1.7% of GDP in 2018, from 2.8% of GDP in 2017, narrower than the 1.9% deficit forecasted by the government in September. In part, the narrower-than-expected deficit can be attributed to taxes from the sale of a stake in a private mining company as well as some expenditure saving efforts. However, the monthly report of the Pension Reserve Fund shows that the government withdrew a total of USD 525 million during the year, as permitted by law. The authorities indicated they preferred to take advantage of the law rather than increasing debt last year. The is only the second year that the government has withdrawn funds (the previous being 2017: USD 314 million) since the creation of the fund at the end of 2006. The withdrawal is around 0.2% of GDP, suggesting that without such funds the nominal balance would have end 2018 in line with the 1.9% expectations (and somewhat larger if the unexpected mining sale did not occur and favorably affect revenue). Nevertheless, fiscal consolidation is underway, with real expenditure growth slowing to 3.4% last year (4.7% in 2017), the slowest expansion since 2011. Despite the commitment to even lower expenditure growth this year (3.2% yoy budgeted), we see the nominal fiscal deficit broadly stable for the year (1.7%), as copper prices post some retreat and activity moderates somewhat. With the government targeting the stabilization of debt (as a percentage of GDP), rating agencies would likely remain bay (since the preoccupation has been with the speed of the debt increase rather than levels).


The central bank published detailed inflationary measures for January, when inflation remained contained and close to the central bank’s 3% target at 3.15%. These were the first data utilizing the new consumer basket (2018 base year; 2008 previously). Average core inflation dropped to 2.99% (from 3.03% in December). Additionally, tradable good prices (excluding food and regulated items) continued to drag down inflation (1.03% vs. 1.09% previously), while non-tradable prices ticked up to 3.87% (3.79% in December). With the negative output gap prevailing this year, inflation controlled and inflation expectations anchored, we see the board maintaining the monetary stimulus for longer, until the output gap is clearly narrowing. The policy rate is still likely to end the year at 4.75%, but the first hike would only come in 2H19.


The Central Bank of Argentina limited banks’ holdings of seven-day central bank bills (Leliqs) to avoid volatile capital inflows. The new regulation establishes a cap on investments in Leliqs of 65% of banks’ peso deposits (excluding deposits from other financial institutions) or 100% of the banks’ capital. The deadline for adapting to the new regulation is April 2019. We noted that the ARS has recently traded below the lower bound of the non-intervention zone, prompting the central bank to purchase dollars without sterilization, as agreed with the IMF. Meanwhile, the yield of the Leliqs fell below 50% (from 59% in December). Our measure of the ex-ante real interest rate (using the expected inflation for the next three months) is currently at 20%.

Fixed Income LatAm Strategy

Brazilian rates were the only ones in LatAm that widened and steepened last week, as the market reassessed the timing for pension reform. Elsewhere in Latam, rates continued to tighten slightly, still reflecting the dovish shift in the Fed, lower U.S. rates, and benign domestic inflation and activity data. This week the global focus will be on the U.S. and China trade negotiations, as government officials from both countries (Mnuchin, Lighthizer and Lie He) are set to meet in China on Thursday and Friday. We see a good chance that talks advance and President Trump may set up a meeting with Xi to close the deal (in case of a deal we see 65% chance of no further tariffs, and a 35% chance of removing some of the existing tariffs).
** Full story here.

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